Sean … I very much agree with your points above. Scary when you contemplate how big the bubble was pumped-up before the giant hissing (deflating) sounds became audible in 2007/8. We?re now 5 years into the deflating bubble and I?m not sure how much more air needs to come out of housing? As we can observe via Foreclosure Radar, shadow inventories remain quite large.
Like a fully loaded supertanker, housing is unwieldy and despite a few positive trends (e.g. good corporate earnings, slight recent improvement in unemployment numbers), the market cannot turn around on a dime. Plus there are icebergs that can further damage the supertanker’s hull … such as government-sponsored entities (GSEs) stepping back from being the dominant provider of mortgage funding.
Banks may take up some of the lending slack, but likely at higher interest rates. The Fed may have to raise rates … Bernanke knows he can only ignore the winds of inflation for so long before throwing is reputation on a funeral pyre. When the Fed moves to raise rates, that iceberg will impact housing.
Another scary thought ? 90% of mortgage loans made (still today) are “government backed” and lending effectively remains a State run industry. That makes me uneasy, to say the least, as the U.S. Taxpayer bailout of Fannie/Freddie has already reached $130 billion, a number that exceeds the bailouts of AIG, GM, Citigroup & Goldman Sachs combined. Moreover, were only getting started ? IMHO that 130 billion figure will double over the next several years.
Fannie/Freddie used and abused their implicit govt. guarantee (a self-full-filling prophecy ? implicit became explicit) to proliferate securitization of mortgage loans, and private fortunes were made by Fannie/Freddie executives. ?We help regular people achieve the dream of homeownership? was their mantra. Sadly, for many that dream has morphed into a nightmare.
What irks me is lack of accountability ? Virtually zero banking execs (and you can toss in a few politicians) have been held responsible for the mess they?ve helped create. Yet, I recently read that several pawns in the game (those who took ?liars loans?) have now been prosecuted and gone to jail. Not that many who took the via loan app falsification don?t deserve punishment (they do), but geez ? what about those most responsible for creating the melt-down? Instead of jail, the Kings and Queens in corporate suites were rewarded with seven figure bonuses (no claw back) and Angelo Mozilio is still out there working on his tan.
The fact is that many senior Wall Street/banking execs knew what was ?going down? well before the 2008 crash. Private audits conducted by banks in 2007/8 showed that a large % of the loans bundled up and securitized were a putrid mess, and questioned how rating agencies performed their magical alchemy to bestow the majority of these CDOs with a triple-A (?AAA?) ratings. The recently released (2011) Financial Crisis Inquiry Commission (FCIC) Report provides a stinging indictment of the Sergeant Shultz (?I know nothing?) execs. Quoting FCIC Chairman Phil Angelides:
?The extent to which lending institutions created, bought, sold securitized (packaged and repackaged) loans that they knew to be defective (is shocking)? and they spread them across the marketplace like an infection ? we found that a firm called Clayton Holdings, on behalf of most of the big banks ? UBS, Goldman, Citigroup, Deutsche Bank? would review the loans that were coming in from New Century or Ameriquest or other sub-prime lenders ? they were reviewing these loans ? they were finding out that 28% of these loans, on average, weren?t even meeting the lousy lending standards in 2006/7 ?. Despite that, they accepted 39% of the loans to package and they never disclosed this to investors ? Fannie Mae and Freddie Mac found $35 billion in loans that they were sold that did not meet the standards that were warranted and represented at the time by the lenders. We have information that Citigroup, from a guy named Richard Bowen, (who oversaw $90 billion in lending at Citigroup) that 60% of the loans Citigroup was buying and re-selling were deficient and didn?t meet underwriting standards ? it was an epidemic of defective lending and these big institutions knew the risk and they didn?t disclose them to investors and that?s pretty serious business.?
Most banking execs turned a blind eye as the personal risk/reward calculus was too much weighted towards ?don?t stop the gravy train? ? i.e. > profits were too substantial to stop the madness.
FWIW (in case anyone wants to read more rambling rants), I wrote an article on the financial crisis underpinnings back in 2008 > http://iphonasia.com/?p=2664